In the good old days when Harshad Mehta was the god of the investing public and every day saw half a dozen new offerings which were all over-subscribed, the capital market was subjected to gigantic ramping. Financial analysts and the pink
papers shouted hoarse that something was stink-ing in Dalal Street. When the then Finance Minister, Manmohan Singh, was quizzed on the subject, his reply was the still-remembered classic: "I don’t lose sleep over what happens on the share market." This comment came back to haunt him when the Harshad bubble burst and it was found that the tentacles of the scam extended into the nationalised banks, the stock market managements and, it was alleged, even SEBI and the Ministry of Finance.

Perhaps it was for this reason that the present Finance Minister, Jaswant Singh, ordered an immediate probe when the markets went crazy in the last week of May this year. Unfortunately for him, his well meant order appears to have boomeranged on him just as Manmohan Singh’s comment left him with egg on his face.

First a little background. When the banks were nationalised during Indira Gandhi’s regime, the Government became the sole shareholder. With liberalisation and the opening up of the economy which started in 1991, banks were allowed to tap the capital market for additional funds. Their offerings were snapped up by the institutions and, by and large, bank shares came to represent one of the few consistently profitable investment avenues for the public.

Further liberalisation and autonomy given to banks in their financial operations and full Government support in their effort to go after large, influential corporates who were kite flying with bank money, saw pragmatic professionalism entering the banking sphere. With the private sector allowed entry, competition became fierce and, probably for the first time, the nationalised banks focused on what should have been their primary objective: bolstering the bottom line rather than serving as a milch cow for financing poorly developed government-initiated social schemes. One of the steps banks considered was to buy back their equity held by the Government so that they could reduce their inflated capital base.

And that’s when the trouble started. At what price would the Government sell its holding to the banks? On May 28, a Finance Ministry spokesman categorically stated that the Government had no proposal to charge a premium on the equity returned by the banks. This meant that the banks would pay the Government just the par value for its holdings. The market was overjoyed. Bank shares, which were already trading at a good premium, hit the upper circuit breaker within minutes. This surge continued for two days—and then came the damper.

On May 30, the Ministry of Finance changed its tune saying that it was still undecided whether the buy back would be at par or at a premium. It had finally realised, late as usual, that the Government stood to lose crores of rupees if it accepted the par value route. The next trading day was June 2 and bank shares took a severe beating on the bourse. And that’s when the Finance Minister put his foot in it.

He ordered a probe by the regulator, SEBI, into the wild fluctuation in bank shares. There was even talk of a CBI probe since it was believed that players had made a killing of up to Rs. 40 crore in just two days. SEBI was quick to make its assessment (not really a difficult task, since the economic dailies speculated widely on the Finance Ministry’s doublespeak and its impact on the market). In effect, it told the Finance Ministry: "You did it. It was your contrary statements that got the market going." What was implied was that if the contrary statements were deliberate, they had possibly led to insider trading on the bourses.

The scam, if indeed there was one, was contained. But a few things are clear. One, the Finance Ministry (despite Jaswant Singh’s prompt demand for a probe) is still, for some reason, unable to give due importance to happenings in the capital market. All it had to do was read the newspapers to know why bank shares rose and then crashed. Two, the Ministry has too many spokesmen and none of them seem to know, or care, what the others say. And three, the Ministry appears to lack the basics of dealings in stocks and shares. What is the first thing any shareholder does when he decides to sell his shares? He looks at the ruling market price. When all bank shares were trading at a premium, why did a Ministry spokesman deny that there was any proposal to charge a premium for the buy back? Even if he was ignorant of how the capital market worked, his statement does lend itself to apprehensions of its being a build up to a scam.

It appears that our finance administration has become so involved in the scam-culture that it is like a fish out of water in a clean environment and deliberately goes about making statements that could lead to suspicions of a scam.